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Matt Loney isn’t taking anything for granted or ignoring any competitor. He insists he knows better, a product of an early professional education on the restaurant industry’s ebbs and flows.

The youthful president of Stevi B’s, an Atlanta-based pizza-buffet franchise that has earned acclaim for its specialty pizzas, Loney has witnessed grocery stores gain a larger slice of the restaurant pizzeria world’s business.

“Our data shows that people eat pizza six times a month and, on average, they’re getting that pizza from a grocery store well over two of those times, a full point rise from just three years ago,” Loney says. “The grocery store is now almost accounting for half of all pizza consumption.”

Such a reality compelled Loney and his Stevi B’s team to fashion a response that includes highlighting the brand’s specialty pizzas and rethinking the restaurant’s to-go business. At pizzeria offices throughout the nation, similar conversations are occurring as operators seek to regain fleeing business.

“In the last two years, we’ve seen an entire night of pizza consumption shift to the grocery store category,” Loney says. “That alone is reason to be aware and cognizant of the retail sector.”

Yet, this is not pizza’s battle alone.

In grocery stores across America, prepared and ready-to-eat meals are gobbling up share—not at a breakneck pace, but at enough of a clip to spark trepidation. From chicken to Chinese egg rolls, macaroni and cheese to meat loaf, pasta to pot roast, America’s grocery stores are expanding their culinary horizons, directly pursuing the foodservice dollar while touting the convenience of retail for other personal purchases.

A recent report from market research firm Packaged Facts titled “Prepared Foods and Ready-to-Eat Foods at Retail: The New Competition to Foodservice” noted grocery’s gain amid the restaurant industry’s recessionary struggles. As consumers shifted from spending at restaurants to saving dollars and dining at home, supermarkets pounced with more diverse ready-to-eat offerings, competitive prices, and one-stop-shop positioning.

Half of the report’s nearly 1,900 U.S. respondents said they were more likely to eat dinner at home today than three months ago—with nearly one-third doing so “a lot more.” Meanwhile, 64 percent said they purchased a prepared meal from a grocery store within the last month.

“Prepared foods are a retail offering that’s come into its own,” says David Morris, the report’s chief analyst. “It’s definitely entered the mainstream from the foodservice perspective and achieved great strides in terms of quality, breadth of offerings, and major players to make it more competitive.”

“I don’t think there’s reason to panic, because to some extent we’ve always competed with grocery for a share of the stomach,” Loney says. “At the same time, we can’t deny that the grocery stores are competition and the quick-service segment has to be willing to evolve. If quick-service leaders aren’t aware of grocery stores’ efforts, they certainly should be.”

The intensifying competition has inspired confidence in grocery channels, many of whom tout the segment’s vast potential and continue to experiment in the relatively young field. Although not a new battle, it’s surely an escalating one.

“The grocery store is now almost accounting for half of all pizza consumption.”

“Retail should definitely be on the radar of any restaurant operator,” Morris says. “It’s a competitor that can, will, and is stealing share, as consumers use prepared food as a substitute for the restaurant meal.”

Competition Heats Up

Although grocery stores began flirting with prepared meals as early as the 1970s, the last decade witnessed the most intense and rapid growth. Well before the recent economic shift, grocers activated more robust and attractive prepared meal programs to lure in consumers craving convenience, value, variety, and healthier choices. In many cases, grocers altered their deli service models and renovated stores to reflect their new focus on consumers claiming neither the time nor interest to cook.

“The grocers saw restaurants taking more market share and people turning away from their retail stores, so they made an aggressive play to get back in the game by championing convenience, which is what these prepared meals are all about,” says Suzanne Long, a retail practice leader with New York–based SSA & Company.

Publix, a grocery chain based in the South, is one such player. Focusing on two-career families and time-starved customers, the supermarket upped its investment in ready-to-eat meals a decade ago, creating a variety of prepared food offerings, such as steaks, seafood, chicken, and sandwiches.

“Over time, we grew the category based on trends and diversified our offerings to meet consumer desires,” Publix spokeswoman Dwaine Stevens says.

With positive consumer response, the movement accelerated at grocery stores—big and small, private and public—across the country. Even amid recessionary pressures, the play has been a positive one for the grocery segment. From February 2009 to February 2010, grocery stores, long mired in decline, welcomed 4 percent sales growth.

“Today, the grocery channel embraces the prepared meals idea precisely because it has driven sales in a positive direction,” says Steve Johnson, the head of Foodservice Solutions in Tacoma, Washington. “Even more, they’ve realized that they can build consumer loyalty by serving fresh food.”

Johnson, who blogs about the so-called “grocerant” segment and serves as an industry consultant, says grocery stores have done a strong job of positioning their ready-to-eat products as healthier alternatives to restaurant fare.

“Many options are fresh, sustainable, and local, all of which creates a perception of healthy,” he says.

Indeed, prepared grocery store offerings have evolved from their primitive roots with rotisserie chicken and potato salad. Today’s leading grocery stores, and even a few local players, have created a litany of ready-to-eat options well beyond the norm.

“There are more choices than ever and that’s real empowerment,” Johnson says. “Overall, the restaurants overlooked the reality of this momentum and how it allowed households to bundle. The grocery channel can offer something compelling and powerful to consumers.”

Perhaps no chain, however, has better characterized the grocerant growth than Whole Foods, the world’s largest retailer of natural and organic foods. Whole Foods positions meal stations throughout its stores, many of which capitalize on the company’s fresh image by offering regional fare.

“You might walk into a Whole Foods at dinner time and the aisles might be empty, but there will be a crowd at those meal stations,” Johnson says.

This is not a passing trend, Johnson says, but rather a swelling competitive reality. He points to a number of supermarket brands creating private-label items to jolt their prepared-meal offerings, as well as convenience stores, which are joining the prepared meals game as well. Later this year, Walgreens will trial individual prepared meals, such as wraps and soups, at many of its outlets.

For Publix and many of its supermarket brethren, the year-over-year growth has spurred continued investment and experimentation.

“There’s customer demand and popularity here,” Stevens says. “Consumers are flocking to these venues to take care of their household’s needs, and we want to fulfill their expectations.”

All of this attention to foodservice comes at a fortuitous time for grocery stores.

“Grocery stores provide supplementary food products and that can keep the customer in-house even as the recession wanes,” Morris says. “That’s an important consideration here as we move forward.”

Defense to Offense

In late July, the NPD Group, which has been tracking in-home eating habits and foodservice trends over the last 30 years, projected that the need for prepared meals would continue to grow over the next decade. Driven largely by convenience, the report surmised, restaurants and supermarkets both have opportunity to claim the consumer’s dollar.

Generating restaurant business, however, will not happen by accident.

Morris says restaurants must enhance their value proposition with price and quality messaging, customer-service initiatives, and convenience to maintain their relevance with consumers. Fundamentally, quick serves must ensure that their menus can compete on value and quality, the two most prevalent factors in consumer eating decisions. For $10 at a grocery store, a customer can purchase a rotisserie chicken, two side dishes, bread, and a drink. Quick serves will need to match that value proposition to ward off this challenge.

“As an operator, you have to recognize that people can and will go elsewhere,” Morris says.

To defend their quick-service brands, operators will have to migrate with a customer that is dynamic, not static. Stevi B’s Loney and his team have investigated building a separate to-go window, simplifying online ordering, and launching aggressive marketing initiatives, such as bounce-back offers to spur to-go sales, all efforts to counter grocery’s competitive momentum.

Additional quick-service solutions include selling at various distribution points, creating smaller units, and licensing. Take-and-bake options, which allow consumers to enjoy a restaurant-quality meal in minutes at home, also offer opportunity.

An additional key, Morris says, resides in restaurants offering items that consumers are drawn to and which cannot be easily replicated. That’s why Loney feels confident that Stevi B’s can withstand the supermarket assault in the short and long term.

“We have pizzas you can’t get anywhere else, so that’s a real advantage,” he says, pointing to his specialty offerings like the Macaroni and Cheese Pizza and Loaded Baked Potato Pizza as prime examples. “By better informing our customers, we can make a dent in the business we’re losing to grocery stores.”

One unusual solution Long sees is the opportunity for collaboration, specifically to make restaurant-branded products available in supermarkets. Publix recently opened a Carrabba’s Italian Market in its Sarasota, Florida, outlet—a relationship filled with optimism for both the grocer and the casual-dining chain.

“This is an underutilized spot with plenty of opportunity,” Long says. “Why can’t there be the Taco Bell taco bar, KFC-branded chicken and cole slaw, or branded barbecue ribs in the service delis? There’s an opportunity here to leverage the restaurant brand in the grocery store to draw more customers in.”

Such partnerships are something Stevi B’s pursued, but ultimately rejected. Loney cited the supermarkets’ cash-for-product-placement initiatives and fears about cannibalizing the product and sparking tension with franchisees as pressing concerns he could not overcome.

“You weigh all of this out and you see that it’s just not a viable option, and our energy is better placed elsewhere to grow the top line,” Loney says.

Amid the intensifying competition, quick-service restaurants can take solace in one reality: This is no slam dunk for the grocery stores. The customer coming in solely for a prepared meal is far from the norm, as supermarket visits are still driven by the need to shop for a variety of items.

More importantly, supermarkets have struggled with supply chain issues, portion size, and shelf life, trailing well behind restaurants in operational efficiency and the ability to collectively leverage convenience, location, quality, and value. Many supermarkets are looking at brand advantage and are often unwilling to pursue the operational advantages that could propel them to new heights, Long says.

“And ultimately, this could be their downfall and lead to many struggles,” she says.

But for Loney, and many other quick-service operators, the battle rages on. Solutions are sought, new avenues pursued, and counterattacks launched. Nothing can be taken for granted.

Now even Walgreens is competition?

In August, Walgreens unveiled its new expanded food selection in 10 Chicago communities identified as food deserts, or areas that lack access to basic foods necessary to maintain a healthy diet. The company redesigned the stores, located on Chicago’s South and West Sides, to include more than 750 new food items, including fresh fruits and vegetables, frozen meats and fish, pasta, rice, beans, eggs, whole grain cereals, and other meal components.

“We immediately made a commitment to seek solutions for offering these communities more fresh and healthy food options,” says Mark Wagner, Walgreens executive vice president of operations and community management.

Walgreens is also reviewing opportunities to bring its expanded food selection to other food deserts across the country. “We know this issue is not exclusive to Chicago,” Wagner says. “We have more locations in America’s underserved communities than any other retailer. That makes us well positioned to play a role in addressing this important need beyond Chicago.”